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No doubt about it – $20 trillion is one big number. But what does this mile marker mean when viewed through the lens of your retirement savings? The S&P500 is expressed in terms of market capitalization which is simple to understand once you learn it but very confusing along the way. Your retirement account is most likely comprised of “large cap, mid cap, small cap, growth and value companies!” Sounds like a recipe and it really is, as each word and phrase says something different about the “ingredients” in your plan.
Market capitalization has nothing to do with the profitability of a business, the cash on hand, the patents, the buildings or the people. Rather, market capitalization refers to the current price for one share of stock multiplied by the number of outstanding shares. Each S&P company differs in the number of shares initially authorized and then issued and traded on the equity markets.
Apple, the world’s largest company by market cap, is currently trading at $135 per share. The market cap is an astonishing $710 billion dollars. That tells us that there are over five billion shares of stock outstanding, all with identical value and voting rights. Like Apple, Cimarex Energy (XEC) trades for approximately $135 a share but its market cap is only $12.8 billion. It has less than 95 million shares of stock outstanding. The price per share tells you nothing!
The $20 trillion S&P 500 number represents the market cap of each and every company included in the index. Apple alone is almost 4% of the entire S&P 500!
The numbers have scaled up since I entered the industry in 1987. We have added “mega caps” into the mix. Mega caps are usually over $200 billion. Large caps are $10 billion or more though many in the industry, including me, feel this number should be closer to $15 billion. Mid-caps are $2 billion to $10 billion and small caps are $300 million and up. The cap has nothing to do with the size of the business, the headlines in the news or the number of people employed, but it does signify where investors find the most value. Arguably that perception of value comes directly from the business model, profitability, etc.
Growth implies that fund managers believe the price per share of the companies they are buying is a fair value for what the company will eventually become. That is why companies like Amazon had a market cap greater than many other companies even before it became profitable.
Value infers that managers are buying companies where the current share price is worth the value of the underlying company today. These companies tend to pay dividends where growth oriented companies tend to reinvest capital.
So what is the right recipe for you? As a professional money manager (and amateur cook) I would tell you the recipe changes as the economy changes. As a CFP I would tell you that your mix should change as your stage of life changes.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column offset=”vc_hidden-lg vc_hidden-md vc_hidden-sm”][vc_widget_sidebar sidebar_id=”sidebar-main”][/vc_column][/vc_row]
